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benfrog writes "According to the Wall Street Journal, Facebook's Board of Directors was all but out of the picture when Mark Zuckerberg struck the $1 billion deal to purchase Instagram, the yet-profitless photo-sharing service. From the article: 'It was a remarkably speedy three-day path to a deal for Facebook—a young company taking pains to portray itself as blue-chip ahead of its initial public offering of stock in a few weeks that could value it at up to $100 billion. Companies generally prefer to bring in ranks of lawyers and bankers to scrutinize a deal before proceeding, a process that can eat up days or weeks. Mr. Zuckerberg ditched all that. By the time Facebook's board was brought in, the deal was all but done. The board, according to one person familiar with the matter, 'Was told, not consulted.'"

Bad loans were the core of the housing bubble. To understand the reason behind it all, you've gotta ask yourself one question: "Why would lenders make loans that are unlikely to be repaid?" Answering that question leads to the answer behind the bubble. It was a bubble in supposedly AAA-rated mortgage debt.

Here's how it worked:1) Securitization of mortgages into MBS (mortgage-backed securities). [businessweek.com]2) Banks made money from selling the loans to securitizers and getting them off their books, not keeping them and collecting interest.3) Demand for these securities skyrocketed, as they were thought to be safe and reliable income streams.3) This led to the utter deterioration of loan quality, as banks basically just needed to get warm bodies to make loans to, create the loan and sell it. You started seeing things like NINJA loans (No Income No Job or Assets - NINJA) and option ARM loans made to risky borrowers. All included in securities rated AAA.4) Investment companies bought these loans, ratings agencies stamped a AAA rating on them and the securities were then sold off. Buyers hungry for safe and reliable high interest returns couldn't get enough of it. Thus a bubble was formed.

Basically, for mortgage originators, it was like printing monopoly money, and then turning it in for actual currency. When borrowers started defaulting en masse, the whole house of cards came tumbling down.

The politicians, funded by the investment bankers, made it possible. It was a really bad idea to tie investment banking to retail banking in the 1920's and a bad idea today. The investment bankers created investments out of the mortgage pools and sold them off by risk (with the top being AAA). This meant that more groups could buy shoddy mortgages (some organizations required AAA investments) and get a higher return. More money flooding into the system meant pressure to make more loans (and more fees). Without any vested interest in the loans (the banks were just going to sell them anyway), oversight became lax. Once that wall was broken down between investment and retail banking in the 1990's, bubbles with traditional retail banking assets were inevitable.

I worked for a large finance company during that time (just a harmless middle manager, so don't blame me). We had all our clients money market assets in "AAA" mortgage backed securities. We made 6% and paid 0.25% return to our clients. Life was good (until it all came crashing down). So, I guess greed is what really made it possible.

Ah yes, blame the nerds. That's how it goes, right? Hackers steal your money and government secrets, nerds will shoot up your school, and they smell all funny to boot. Except it's *criminals* who will do those things, not hackers and nerds. When someone gets arrested for robbing a bank, you don't say "A construction worker held up a bank." It's no different here, and labeling them just feeds a stereotype.

And while derivatives may have been invented by quantitative analysts (quants), they're not inherently risky -- they're just a vehicle. It's the type and diversity of securities packaged in the derivatives that determines the risk. The bankers knew full well what was getting packaged and why. The quants just gave them the "how." I'm not saying the soldiers aren't responsible for the consequences of following orders, but there's plenty of blame to go around, and ultimately those in command should be (or have been) held most responsible, since they are. That is, allegedly, why they get paid the big bucks.

I think GP was making a joke. "so on and so forth" is kind of an indicator.

Bingo! I meant that as half sarcastic and half serious. My understanding is that "some people" took some theoretical concepts and applied them to overly optimistic data. (Amongst all the other problems, and simplified terribly.) This isn't a nerds/business people thing...if you use data that thinks real estate can only go up then how is it ever going to tell you real estate otherwise?

Not really. It's hard to have a huge bubble without fiat currency. It can be done but they are usually self correcting. But if you have the ability to borrow money into existence you can create a HUGE bubble.

The troubles of our present day have everything to do with the decisions of financiers and bankers, and almost nothing to do with anyone else. Zuckerberg might have a lot of money, but his ability to cause a bubble in anything pales in comparision to that of even a small bank or hedge fund.

Market bubbles happen when something takes on an unreasonable value and continues to grow, people see that it grows and jump on, causing further growth, until there aren't enough new entrants to sustain the expected and required growth. Sometimes the subject of the transaction is something of actual value (property, raw materials), other times it's something of only representative value (Flowers [wikipedia.org], dotcom companies). A few investors can help the bubble grow, but they certainly aren't the cause. If anyone can be blamed, it's those who sensationalize and provide positive news coverage to bubbles, causing more people to join who might not have done so otherwise.

I saw signs of the housing bubble in 2002 when houses that I felt weren't worthy started crossing the $150,000 mark in this market. When we got married in 2007 we chose not to buy another house, thank goodness. We instead did so in 2010-2011 after the market crashed and got a short-sale for about half of what was owed on it. Our only real lament is not selling the old house when prices seemed ridiculous and renting for a couple of years. We could have tripled our square footage and had no loan if we had done so.

As for the dotcom bubble, that happened because a lot of people who didn't understand technology thought that those who claimed to had something of value, and thousands of companies that had no real product got money poured at them by greedy people who expected to be the next Bill Gates. Fast forward to now, and Zuckerberg is already a rich man, and his company is strong at the moment, so his acquisition isn't really the same thing.

Ten years ago, people were deploying exactly the same technologies on the back end (VM instances that were live migrated, spawned and destroyed on demand, and - where needed - fault tolerant using redundant images kept in sync on separate instances). Back then, it was called grid computing, not cloud computing. Twenty years earlier, almost the same thing was called a mainframe, or a mainframe cluster if you wanted your cloud to encompass multiple sites.

The only real change with the cloud is that now we're doing the same things but with cheap commodity hardware and cheap commodity software. For example, fault tolerance is now part of the standard Xen distribution, but if you wanted to roll it out a decade ago you needed to pay a company like Marathon a lot of money for their hypervisor. If you wanted to roll it out two decades ago, you bought a very expensive VMS system from DEC / Digital (later HP). Now, you can have two (or more) instances of the same VM running on separate sub-$1000 computers, and if one computer dies then people using it don't notice. Total cost of deployment is a couple of thousand dollars of equipment and a couple of hours of time.

It's the same thing with a lot of other technologies: it's not that they're especially novel, it's that now you can do something everywhere you want to, where previously you could only afford to do it everywhere you absolutely needed to.

We are not in another tech bubble. There are certainly isolated instances of overvaluation, but overall, there isn't a consistent pattern of it. Take Groupon for instance. It's almost certainly headed for failure, but people have pretty much already caught on to that and the stock has already receded from its IPO. In fact, it never really enjoyed a large and long stock burst that you'd expect in a bubble. Pandora is also well below its IPO. Facebook, while well overvalued at $100B in my opinion, seems to have a solid revenue and profit stream and isn't particularly indicative of a bubble (though buying Instagram at $1B certainly doesn't make me want to be an investor, long term).

I think there was some realistic fear of a tech bubble back before any of these "sexy" IPOs actually took place and people seemed overly eager for them. But with a little bit of bubble-fear from the media, people seem to have stepped back and are respecting true valuations again . . . more or less.

And yeah, Zuckerberg making a dumb (or more probably, cronyism-based) decision for his company is neither here nor there.

As far as I can tell, all the "cloud" stuff has actual products with actual value backing it.An internet service which is labeled as "cloud" isn't valued higher than the same service without the label and both seem to be valued proportional to the actual product involved.In order for a bubble to grow, there has to be a disconnect between actual product value and percieved value.

Although in the case of Instragram, we might have a very localized bubble. Seriously, what does this service offer that hasn't alre

Not having a loan also means having the option of having more disposable income when raising children, or being able to have a work arrangement more compatible with personally raising kids. It also means that if one is absolutely fed up of one's job, one has the choice of leaving when one doesn't have to worry about where to live.

Our current loan is financed at 3.75%. We're well aware of the benefits of having a very inexpensive loan. But, even if we had the cash to invest or to pay a chunk of the loan off with, we'd seek to "recast" the mortgage to have both the lion's share paid and to have ridiculously low monthly payments, instead of investing, because owning a home is a sure thing, while investing certainly is not. If anything, we could buy third property and rent that property out too, like we did our old home, and make even more money. But, we're not worried about that, and since we're not terribly greedy people, we're not looking for every possible avenue to make money.

The problem most people overlook is that you can't make plans for the next 30 years based on the current scenario. A lot of thing scan happen in such a large time span.

Which is kinda the point. Over 30 years a lot of things can happen, but in theory you have the benefit of handing your decisions over to statistical predictions, based on past performance. So there will be wars, and shortages, and fads but overall there will be growth and innovation - now, if there ISN'T then we have a far bigger problem than whether you're making a 4% return on your investment. Many of the rarer raw materials are becoming more difficult to harvest, but we've barely touched the ocean floor.

And of course, you can make the same returns by getting lucky at the craps table . . . This kind of investing tends to be basically gambling (not saying all the time, but most of the time for most people). But good for you in this particular instance. Wonder what your 5 year, or 30 year returns will be. (Also, it's a 900% gain, not 1000%.)

There are very few people who have any real wealth besides what's on paper. Even those in illegal economies like drug dealers have their money stored as paper. Not many have their wealth in tangible goods, and many who have tangible goods have luxury items like diamonds.

Take away all of the paper and all of the records instantly and I'd guess that 99.9999% of the population would be within spitting distance of each other, wealth-wise. Ironically, farmers would probably be the best off, if they have equipment for production and land.

Ironically, farmers would probably be the best off, if they have equipment for production and land.

What is it that gives a farmer exclusive right over such large tracts of land if not a piece of paper? One person can't reasonably be said to "occupy" tens or hundreds of hectares without the force of law behind them.

And this is before asking what they're supposed to do with unharvested crops without gasoline and/or laborers. Since they need to be harvested first, all he can do to "pay" for things is write an IOU, another piece of paper.

It's not a bad idea, but it's a terrible implementation. It should be a textbook example of what not to do in the field of information presentation. It puts form over function, makes it difficult to read, hard to find info, and makes terrible use of screen space.

For all we know, in social networking, this could really be the Killer App [wikipedia.org]. We won't know until we see how it's used.
I don't personally think that it is, but I'm also not a user of modern social networking either.

MS-DOS was worth billions of dollars, and it was a hackjob because the creator of CP/M wouldn't give IBM the time of day and they needed something NOW.

Google was a research project that proved phenomenonally successful yet started out simply.

Apple was from a few hardware hackers building illegal devices in a garage in the suburbs.

You don't know where the next killer app will come from. In this case, if Instagram was the first company to do this truly correctly in the technical sense, and if Facebook wanted this technology NOW, then we're back to the same scenario as a bunch of hackers in New Mexico ready to fulfill the needs of a giant company from Armonk.

It's one thing creating an Instagram clone but it's another thing attracting the ~30 million members to use it. If Facebook created their own Instagram there's every chance it could turn out like Google+. Why compete with something when you can just consume it?

It could be the killer app, but the real question would revolve around whether or not Facebook could build a superior competitor and win the market for less than a billion dollars. I suspect they could have.

Actually, he's buying the GPS data attached to each and every photo taken via Instagram, which will enable him to better target advertisements for places nearby. What appears to be no business model is actually a very clever one - encourage users to take photo's with their iPhone/Android, apply a stupid sepia tone to make it look "classic" and in the process, tell the service where they are down to a GPS co-ordinate, so that companies in the area can have their products advertised to the users.

Since Facebook (like Google) is an advertising company, this makes a lot of sense.

You had me until this: "Since Facebook (like Google) is an advertising company, this makes a lot of sense"

You're right on about Facebook's $1Billion buying user data, but you're way wrong about it "making a lot of sense"

It is ridiculously foolish and a waste. Facebook.com is a information trading company that uses social networking to gather user data. They are currently doing the IPO in order for the investors and founders to take profits. The company is a legal blackmail scam essentially...one step up fro

The fb ad stats comparing to google is what is important and to say the least they are not up to same standard. To insinuate that fb deserves a market cap of 100b would mean that it's ad market is half of that of googles. In realitity it doesn't even come close.

Fb's only attempt to "grow" is to innovate and that is a tough cookie to swallow, look at the compeition, ms, google, apple, all these brands are delivering communications platforms, media centers, self driving cars ffs. So what is fb to innovate?

Well, that depends on your definition of "scam." They do have to follow the law. As long as they wrote out the actual details of their scam and put it somewhere on display like in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying 'Beware of the Leopard' then they're fine. If they don't do that legal legwork, they could get into trouble.

That looks to me as if they were incredulous at first. After the shock wore off, they probably made their opening number almost as a joke, almost in the "we're not really interested" range. Once they figured out that the money offered was real, they had to absorb the shock before saying yes, and rebuild their poker faces.

If I were offered a BILLION dollars for something that I'd created, the first thing I'd do would be to hire a lawyer or firm capable of verifying the functionality of the agreement and letting them give any points as to things that could cheat me out of my money. That doesn't happen in a few minutes. "Yes" is a foregone conclusion for all but such a small number of otherwise reasonable transactions that it's essentially a certainty.

Mr. Z seems to be a bit immature. Maybe this was an amazingly clever purchase, but it strikes me as a childish exercise in spending. Assuming he retains control of FB after the IPO I don't expect that the company will fare well or spend cash well. IMHO..

Only time will tell us the answer to that though, and possibly not even then. This will pivot on what Facebook does with its new company, and what happens to Facebook writ large in the marketplace and within the rest of the company.

Business leaders think that Zuckerberg is some kind of genius tech visionary because of the success of Facebook. That's why he gets invited to have dinner with the President, and to talk at the World Economic Forum...

There is another hypothesis: he got lucky, he happened to be in the right place, at the right time, doing the right things.

I'm not disagreeing with you about whether this was immature. It very well could have been.

I'd like to put the acquisition into context, though. In 1999 the Yahoo board of directors voted to buy an unproven sports video streaming company, "Broadcast.com", for $5 billion. They didn't have a large base of users. All they had was contracts with the different athletic leagues. That asset completely dissolved in the following years and doesn't exist in any way right now. Check: http://en.wikipedia.org/wiki/Mark [wikipedia.org]

I figured the same thing. At least one of Instagram's employees, Philip McAllister, was at Gowalla when it was picked up by Facebook less than 6 months ago.

That guy might be the luckiest bastard in the world, having worked for 2 tiny companies whose only significant act was getting acquired by Facebook. On the other hand, Zuckerberg could just be funneling company money to friends?

Their whole pitch on making money is presented here in its entirety:". There will be opportunities for consumers to buy extra add-ons like special filters, etc. "So, folks, that's it - special filters, etc. Magical words.

While I'm still unsure how they got their investors to accept a $500M valuation (Series B, was it?), going into a meeting thinking "Yeah, $2B for a popular photo sharing app platform sounds about right" must take some cojones. I probably couldn't sell Instagram for $200M, I wouldn't even know where to start. "So, we have this platform and our users are totally committed to the experience and not just using it because it's hip...and we all know that social media startups tend to stay popular and don't crash after a year or two...and crap, we can totally monetize that thing, like print photos on mugs and stuff...that's like an instant $80M/year right there, minus the cost of the mugs, of course. So, whaddaya say, two billion?"

1. They "compile" PHP into C++ and then into assembly2. Each update to their software requires propagation of a 1.5GB binary blob3. ( 2 ) was causing so much trouble that they implemented an internal Bit Torrent system by which the servers pull the blob.4. Still, several per cent of servers fail to load the new software image on each deployment and have to be manually updated.5. The ( unitary ) release manager has a karma rating system by which to punish developers who make mistakes. This can be "corrected" by bribing him with liquor and cake.

Once Facebook goes public, Zuckerberg is going to be in for a RUDE awakening. He won't be able to treat it like his little piggybank, he will have to consult the board (his bosses after it goes public) for anything he does and the board can fire him.

The vast majority of tech companies that have gone public in the last 15 years have ended up firing the founding CEO after a period of mismanagement shortly after the companies go Public. The exceptions to this rule are rare and I doubt Zuckerberg is going to be one of them. This is the type of stuff they do and after the company is public and the founders ownership is GREATLY diluted they end up getting fired by the board of directors. Usually it's from not seeking maximum shareholder value, but in other cases it's for outright in ability to grow the company.

Personally, I don't think Zuckerberg is going to survive more than 5 years as CEO of the public Facebook. But the VC's and investment banks will have gotten their pound of flesh and moved on.

What will this do to Facebook's future IPO when potential investors see a "maverick" CEO who does what he wants without consulting the board? I can't imagine a lot of fund managers will like the idea of putting billions of dollars at stake with someone like Zuckerberg spending huge sums of money without getting input from people who already own a large percentage of the company.

How does Zuckerberg own only 28% of the stock but have 57% of the voting rights? Are there really that many non-voting shareholders?

Zuck doesn't hold a majority of shares. But he holds class B shares, so he ends up having majority voting rights. IIRC, 57% of the vote. The CEO part is of course irrelevant, in terms of who controls the overall direction of the company.

No different that Bill Gates, that college dropout that was in the right place at the right time, had an ostensible competitor that didn't fit the system correctly, and managed to provide something close enough to what was wanted and needed to cement his place in the market.